Energizer Holdings, Inc.

Good morning. My name is Nick, and I'll be your conference operator today. This time, I'd like to welcome everyone to Energizer's third quarter fiscal year 2023 conference call. After the speaker's remarks, there will be a question and answer session. As a reminder, this call is being recorded. I'd like to turn the conference over to John Bolden, Vice President, Treasurer, and Investor Relations. You may now begin your conference.

Good morning and welcome to Energizer's third quarter fiscal 2023 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, and John Drabik, Executive Vice President and Chief Financial Officer. A replay of this call will be available on the investor relations section of our website, energizerholdings.com. In addition, a slide deck providing detailed financial results for the quarter is also posted on our website. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC. We also refer in our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP financial measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed in this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis, and estimates we believe to be reasonable. The battery category information includes both brick and mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year, and all comparisons to prior year relate to the same period in fiscal 2022. With that, I would like to turn the call over to Mark.

Thank you, John. Good morning, everyone, and welcome to our third quarter earnings call. There are three key messages I would like to reinforce in my remarks today. First, when we laid out our priorities for fiscal 23, we highlighted three strategic areas of focus. Restoration of gross margin, the return to healthy free cash flow generation, and reduction of debt. Three quarters into the year, we have solidly delivered against all three. Second, the demand environment has not progressed as we expected. And while we are tempering our top line outlook for the year, we are reaffirming our original ranges for both EPS and EBITDA, albeit at the lower end, which has been made possible by the terrific work from the organization to sustain the earnings power of our business. And third, we are making tremendous progress under project momentum, with the savings and cash flow generated in the first three quarters exceeding our expectations. We have also identified a substantial pipeline of incremental initiatives, which will be executed over the next two years. As a result, we are increasing our savings expectation by $50 million for a total program savings of $130 to $150 million by the end of fiscal 2025. Let's dig into the progress we have made. Gross margin recovery has outpaced our expectations through the first three quarters of the year, and we are on track to achieve a gross margin of approximately 40% in the fourth quarter which would represent a full year improvement of nearly 200 basis points. The over delivery and gross margin is primarily driven by project momentum, which we expect to deliver between 45 to $50 million in savings, an increase versus our previous forecast of 30 to $40 million. We are not yet back to pre-pandemic levels, but we have come a long way this year and set ourselves up for further progress in 2024. We have also generated free cash flow of over $260 million year to date while absorbing the cash outlays required by Project Momentum. And finally, we have paid down $200 million of debt in the first three quarters and are on track to reduce leverage by over half a turn from our peak in fiscal 2022. While we have made significant progress against many of our key objectives, this year has also presented us with challenges. as consumers manage through the effects of high inflation, rising interest rates, and economic uncertainty. Specifically in batteries, consumers continue to prioritize the category, but after those critical needs, such as food, fuel, and shelter. While volumes continue to improve in the quarter, they did not recover as quickly as anticipated. And value growth, which was largely driven by pricing, has slowed as we lap those price increases. Some of the factors which have influenced the volumetric trends we have been seeing are as follows. First, a slowdown in the US housing market, driving lower foot traffic at retailers who benefit from home sales, which is a key channel for batteries. Second, a shift in consumers' engagement with devices, from both buying new and using existing devices, to spending more time and dollars on experiences like travel. And third, consumers across all income groups changing their behavior to offset their reduced purchasing power, including reducing their household inventory, which is contributing to a 1% reduction in purchase frequency. Our brands, however, have outperformed the category, marked by continued global share growth in the latest three months. Looking ahead, we expect category volumes to continue to improve, with value more closely tracking volume as price increases are lapped. In the most recent reporting cycle, category volumes improved to low single-digit growth in the U.S. Now turning to the auto category, our appearance, air freshener, and performance chemicals businesses all performed in line with expectations. Refrigerants, however, were impacted by mild weather during the quarter across much of the United States, which created revenue headwinds. We have seen positive sales trends in July, however, as the extreme heat across the country has stimulated consumer demand. While weather has been a challenge to top line growth, we have made significant progress improving the profitability of our auto portfolio. In the quarter, we improved segment profits by 270 basis points. And year to date, we have grown segment profit by 55%. This exceptional progress reflects a combination of focused cost measures, sourcing events, and input cost favorability. We also continue to execute against our international growth plans, where we drove organic top-line growth of more than 10% in the quarter. Moving on to Project Momentum, where we have accelerated many of our plans and enacted new initiatives to counter the impact of the challenging demand environment. To date, Project Momentum has delivered $32 million in savings. The addition of a third year, as well as the inclusion of more initiatives into the program, will increase our savings range by $50 million to $130 to $150 million by the end of fiscal 2025. These savings are independent of inflationary impacts. The incremental savings reflect opportunities uncovered by the team since the inception of the program and reflect additional benefits from further optimizing our batteries network. including executing longer lead time initiatives that weren't possible in the two-year program, and ultimately create a network that will enable us to even more efficiently and effectively serve our customers and consumers. The incremental opportunities also involve changes to our operating model to drive a step change in our cost structure, all of which is enabled by digital transformation through the implementation of global standard processes and tools that allow us to streamline the organization reduce spans and layers to create a flatter, more agile organization. Overall, roughly 60% of the program savings will be generated from operational and distribution network efficiencies, 20% from procurement savings, and 20% from SG&A improvements. Consistent with our previous guidance, we expect 80% of the program savings will be delivered through gross margin with a balance to SG&A. We are proud of the progress we have made on our strategic priorities to date, encouraged by recent demand trends, and very pleased with the early success of Project Momentum. This program should deliver significant savings over the next two years, which will help fuel our investments in sustainable growth and deliver long-term shareholder value. Now, let me turn the call over to John to provide additional details about our third quarter performance and balance of the year guidance.